Issue: Whether the Interest income is taxable under head PGBP or under head Other sources ?
In general, Interest Income is either assessed as ‘Business Income’ or as ‘Income from other sources’ depending upon the activities carried on by the assessee. If the investment yielding interest is part of the business of the assessee, the same would be assessable as ‘business income’ but where the earning of the interest income is incidental to and not the direct outcome of the business carried on by the assessee, the same is assessable as ‘Income from other sources’. Business implies some real, substantial and systematic or organized course of activity with a profit motive. Interest, generated from such an activity, is business Income; else it would be interest from other sources.
CIT v. K and Co. (2014) 364 ITR 93 (Del HC)
Facts of the case: The assesse running a lottery , deposited certain funds with a bank in order to obtain bank guarantee to be furnished to the State Government of Sikkim. Such guarantee enabled him to carry on the business of printing lottery tickets and for conducting lotteries on behalf of the State Government of Sikkim. The funds which were held as margin money , earned some interest.
High Court’s Observations: The High Court noted that interest income from deposits made by the assessee inextricably linked to the business off the assessee and such income therefore, cannot be treated as income under the head ‘income from other source’. The margin money requirement was an essential element for the bank guarantee .
If the assessee had not furnished bank guarantee it would not have got the contract for running the said lottery .
Decision: The Delhi High Court held that the interest income received on funds kept as margin money for obtaining the bank guarantee would be taxable under the head ‘Profits and gains of business or profession‘.
